Spain economy grows despite political impasse

29th April 2016, Comments 0 comments

The political stalemate that has left Spain without a government since unconclusive December elections hasn't damaged the economy as official data released Friday showed the economy expanded at a healthy pace in the first quarter.

Gross domestic product (GDP) expanded by 0.8 percent between January and March from the previous three months, matching the growth rate in the final two quarters of 2015, national statistics institute INE said in a preliminary estimate.

Spain's acting government predicts the economy will expand by 2.7 percent this year, then slow to 2.4 percent in 2017, according to new economic forecasts approved on Friday at a weekly cabinet meeting.

It sees the Spanish economy expanding by 2.5 percent in both 2018 and 2019.

On a year-on-year basis, Spain's GDP grew by 3.4 percent during the first quarter, a slight slowdown from the final three months of 2015 when it rose by 3.5 percent, it added.

Business leaders have warned that a prolonged political vacuum could hinder consumer spending and investment but the lack of a government has so far had a limited impact on the eurozone's fourth largest economy, which expanded by 3.2 percent last year.

The statistics institute did not provide a breakdown of what areas fuelled growth in the first quarter but economists say the economy continued to benefit from strong domestic demand.

"We do not see any sign of a significant drop in demand or investment and we expect this trend will continue in the coming months," said Miguel Cardoso, chief economist for Spain at BBVA bank.

Spain has been without a fully functioning government since the December 20 polls which resulted in a hung parliament with power divided among four main groupings, none of them with enough seats to govern alone.

The country is heading for its second general election in six months in June after King Felipe on Tuesday concluded that it would be impossible for parties to piece together a governing majority.

- Deficit challenge -

Spain was hit hard by the global financial crisis, experiencing five difficult years of on-off recession that saw unemployment rocket from a low of around eight percent in 2007 to a record high of 27 percent in the first quarter of 2013.

Spain's conservatives, who came to power in 2011, implemented a tough austerity programme as the country teetered on the edge of bankruptcy, cutting spending and raising taxes in a bid to stimulate growth and reduce unemployment.

The jobless rate has come down to 21 percent as growth returned and the government predicted Friday it will fall to 14 percent at the end of 2019.

"Households continue to benefit from the creation of jobs and gains in purchasing power, due to a fall in consumer prices," BNP Paribas economist Catherine Stephan told AFP.

Spain's acting government hopes steady economic growth will allow the country to bring its public deficit below a limit of 3.0 percent of GDP imposed by Brussels in 2016 -- a year later than initially planned.

It sees the deficit at 3.6 percent this year, compared to a previous target of 2.8 percent, before dropping to 2.9 percent in 2017 and 1.6 percent in 2019.

The deficit stood at 5.0 percent in 2015, the highest rate in the eurozone after Greece's.

Acting Prime Minister Mariano Rajoy's government has vowed to cut spending by two billion euros ($2.3 billion) after it overshot its deficit target last year but it is not certain that it will retain power after June's repeat polls.

European Central Bank's chief economist Peter Praet warned in an interview published in Spanish business daily Expansion on Friday that, whatever the outcome of the elections is, "Spain has no alternative but to pursue reforms" and reduce the deficit.

© 2016 AFP

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